June 18, 2007: Performance Based Pay May Be Right for You
June 18, 2007
by Ron Collier
Acquiring and retaining great co-workers is a daily dilemma
for most contractors. To entice and retain employees, many companies have tried
signing bonuses, extended benefits, better hours, etc., but these efforts are
not always successful in either acquiring or retaining workers. Companies that
are successful at attracting and retaining employees usually have some type of
performance-based compensation plan that rewards great workers and penalizes
poor workers. This article discusses the often misunderstood relationships
between performance based pay (PBP), labor laws, and overtime.
PBP has been around for many years but it was limited to
sales reps and their performance was rewarded through commissions. Today,
contractors are taking this key concept and offering it to field personnel.
Performance pay is based on the premise that if certain standards are met, the
worker earns compensation. Typically performance pay is based on the quality
and efficiency of the jobs, not on the hours actually worked.
Federal and state labor laws allow performance-based
compensation for hourly workers. Since service techs and installers are hourly
workers they are defined as non-exempt employees. Non-exempt employees must be
paid overtime as defined by state labor boards, and must keep a time card for
all hours worked during the pay period. Often a misconception of PBP is that
companies do not have to pay overtime anymore.
The Department of Labor provides a simple formula for the
calculation of correct compensation. The formula consists of three values:
1. Total compensation earned for the pay
2. Total hours worked during the pay
3. Average hourly pay for the pay period.
This calculation must be carried out either manually or by a
computer each pay period to determine correct compensation wages. Even though
the contractor may not use PBP in the company, this calculation still is
performed each pay period. It is the essence of overtime pay guidelines.
COMPENSATION IS COMPENSATIONTotal compensation is defined as all taxable wages earned
during the pay period. This includes normal wages, bonuses, commissions, or
incentives that are taxable. Remember, this is not normal compensation; it is
total compensation. This total compensation can be paid through normal hourly
wages and bonuses or some type of PBP. If you pay a technician $40 per service call
and he does 20 calls per pay period, his total compensation would be $40 x 20
or $800. If you pay a technician $16 per hour and he works 40 hours, his total
compensation is $16 x 40 or $600. If the monies earned through normal hourly
channels, bonuses or PBP, are taxable payroll wages, they must be included in
Total hours worked includes all hours on the job or on the
premises. Time starts, typically, when an hourly worker drives up to your
office or drives to their first job or call. Labor boards call this the primary
or secondary office location. Time does not start when they leave the house,
because that is commuting expense. Time starts when they hit an office
location. This time must be kept on a time card and is completed during the pay
period by the worker or the office and approved for payment. Total hours
include all hours on the job which can be regular or overtime hours.
At the end of the pay period, the company must divide Total
Compensation by Total Hours Worked to get Average Hourly Wage.
The average hourly wage must be equal to or above the
state’s minimum wage. The average hourly wage must be used to calculate
overtime pay if any overtime was worked. Some examples might help to clarify.
Joe the technician has total compensation through
incentives, PBP, and wages of $1,000 for the pay period of one week. During
this weekly period, according to his time card, he worked 40 hours.
Divide $1,000 earned by 40 hours worked to get an average
hourly wage of $25 per hour. Twenty-five dollars per hour is higher than the
minimum wage for the state, so minimum wage requirements have been met. This
state defines overtime as “hours worked over 40 per week” so Joe did not work
any overtime. The paycheck is correct. Now let’s look at the following week.
The following week Joe really does well and earns total
compensation of $1,200 for the week. He worked 50 hours because he was on call
and did some work also on Saturday.
Divide $1,200 compensation by 50 hours worked. His average
hourly wage is $24 per hour that is above minimum wage. However, because he
worked overtime (OT) we must pay Joe additional money. We paid him $24 per hour
for 40 hours and we paid him $24 for each of the 10 hours he worked overtime,
but we need to come back and pay him the half time differential for those
He worked 10 hours overtime times 1/2 ($24) so he deserves
another $120 on top of the $1,200 he was paid. His correct pay should be
PBP REWARDS TALENTED PEOPLEThis is the first hurdle in the PBP debate. Always be
mindful that PBP is not a way to be exempt from paying overtime wages. The
company still has to compensate the individual based on hours worked and
average hourly wages.
Remember, PBP provides incentives for good workers to earn
more money and really great workers can earn a lot more than they do now. Today
we probably put a floor and ceiling on wages, and regardless of performance the
field person cannot escape the ceiling. PBP can take away the ceiling and pay
individuals any amount of monies they are willing to earn. PBP also creates a
system of compensation that rewards and penalizes.
Instead of an owner or manager giving raises or bonuses, the
PBP system provides the avenue for higher wages. The system is fair and if
field personnel take advantage of it, they will make more money. If field
personnel do not take advantage of it, they will make less.
In my opinion as a national HVAC consultant, I believe every
company should implement some form of PBP. The only way most companies reward
field personnel is through a few commissions or by working more hours. Most
companies that have gone to PBP actually reduce their overtime hours and do
more jobs. If personnel work less on jobs, more jobs could be done during the
normal workday instead of after hours and they would make more money.
Ron Collier, Ph.D., is president of the Collier
Consulting Group, a business management consulting firm for the contracting
industry. Ron can be reached by e-mail at firstname.lastname@example.org. Dr.
Collier also appears in this week’s video spotlight on The NEWS home